§ 89.5     To Satisfy an Objecting Unsecured Claim Holder
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 89.5, at ¶ ____, LundinOnChapter13.com (last visited __________).

Prior to the 1984 enactment of § 1325(b)(1)(A), it seemed clear that it was unfair discrimination to create a class of unsecured claims consisting only of a creditor objecting to confirmation when the purpose of the separate classification was to buy off the objecting creditor.1


The 1984 amendment to § 1325(b)(1)(A) offers some statutory support for favorable classification of an objecting unsecured claim holder. Section 1325(b)—the disposable income test for confirmation—forbids confirmation of a plan over the objection of the holder of an allowed unsecured claim unless certain conditions are met.2 One of the conditions that will overcome a § 1325(b) objection to confirmation is if “the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim.”3 In other words, if the plan proposes full payment of an unsecured claim, that creditor’s objection to confirmation under § 1325(b) is defeated.


Section 1325(b)(1)(A) is worded in the singular.4 Anticipating a disposable income test objection to confirmation from the holder of an unsecured claim, the debtor can neutralize the objection by separate classification for full payment. In support of the classification, the debtor would argue that § 1325(b)(1)(A) cannot be given effect unless separate classification is permitted.5


It is doubtful that Congress contemplated the 1984 amendment to § 1325(b) would impact the limits on classification of claims under § 1322(b)(1). However, in any case in which disposable income is insufficient to pay unsecured claims in full, when there is a vocal objecting unsecured creditor—for example, the holder of a claim that would be nondischargeable in a Chapter 7 case6—the debtor might begin with a plan that favorably classifies the objecting creditor for full payment. Upon objection to this classification, the debtor can modify the plan to provide level treatment for all unsecured claim holders.


A few recent decisions have rejected favorable classifications offered to resolve the demands of an objecting creditor. In re Brigance7 rejected a plan that separately classified check cashing services for more favorable treatment. The debtor argued for separate classification based on settlements with the check cashing services and threats of prosecution for insufficient funds checks. The bankruptcy court found the favorable classification to be “akin to ‘buying a discharge’” and held that favorable classification was unfair.8 In In re Veasley,9 the bankruptcy court refused a proposal that the debtor pay criminal fines directly to a state court when the reason for the separate classification was a court order requiring direct payment of the fines. The Veasley court noted, “the mere fact that a particular creditor desires to be treated differently” was not sufficient justification for the proposed classification.10 One reported decision concluded it was unfair discrimination to favorably classify an unsecured creditor as a reward for cooperation in the Chapter 13 case.11


1  See U.S. Life Credit v. Carter, 9 B.R. 140 (Bankr. N.D. Ga. 1981) (Class consisting solely of creditor objecting to confirmation and created for the purpose of resolving the objection is unacceptable because it is discriminatory and opens the door for potential abuse.). Accord In re Calvert, 17 B.R. 507 (Bankr. W.D. Mo. 1981).


2  See discussion of projected disposable income test beginning at § 91.1  In General.


3  11 U.S.C. § 1325(b)(1)(A). See § 168.1 [ Payment-in-Full Option ] § 91.7  Payment-in-Full Option.


4  Although the rule of construction in 11 U.S.C. § 102(7) requires that the singular word “claim” in 11 U.S.C. § 1325(b)(1)(A) includes the plural, reconstructing § 1325(b)(1)(A) to read in the plural does not resolve the argument that § 1325(b)(1)(A) permits cashing out a single separately classified objecting unsecured claim holder.


5  See § 168.1 [ Payment-in-Full Option ] § 91.7  Payment-in-Full Option.


6  See § 156.1 [ Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case ] § 88.10  Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case.


7  219 B.R. 486 (Bankr. W.D. Tenn. 1998), aff’d, 234 B.R. 401 (W.D. Tenn. 1999).


8  219 B.R. at 496. Accord Cash in a Flash v. Brown (In re Brown), 229 B.R. 739, 748–49 (W.D. Tenn. 1999), aff’g In re Brigance, 219 B.R. 486 (Bankr. W.D. Tenn.) (Affirms rejection of proposed settlement that would separately classify a portion of deferred presentment service provider’s claims for payment in full in advance of 12% payment of general unsecureds. “The fact that Debtors and Cash in a Flash have reached settlement agreements sheds little light on the question whether Debtors have unfairly discriminated against their other unsecured creditors. . . . One of the hallmarks of unfair discrimination is deferred distribution on one class of claims until after the completion of payments to another class of claims. . . . Moreover, the disparity between 100% . . . and 12% . . . so large as to strongly suggest inequity and unfairness. . . . The only difference resulting from the proposed classification is the aggregate time of repayment. Whereas the unsecured creditors will receive their allotted payments over the course of sixty months, Cash in a Flash will have its claim . . . repaid in twenty-four months. . . . [N]either Chandler nor Cash in a Flash offered any justification for this classification other than personal preference. Where no reasonable basis for the classification has been offered, even this slight difference in treatment must be deemed unfair.”).


9  204 B.R. 24 (Bankr. E.D. Ark. 1996).


10  204 B.R. at 25–26.


11  In re Dant, 9 B.R. 117 (Bankr. E.D. Va. 1981).